IRS May Have to Refund $300 Million After Federal Judge Rules PTIN Fee is Illegal

June 6, 2017

Disclosure: I am one of three named plaintiffs in this case. The full caption is Adam Steele, Brittany Montrois, and Joseph Henchman, on behalf of themselves and all others similarly situated v. United States of America.

A federal judge ruled on June 1 that the Internal Revenue Service (IRS) exceeded its authority in collecting fees for issuing Preparer Tax Identification Numbers (PTIN). The IRS requires PTINs by paid tax preparers, and while D.C. District Judge Royce Lamberth ruled that the IRS could do so, he concluded that the fees are illegal in that they are not a “service or thing of value” provided by the agency. The case is Steele, et al. v. United States, No. 14-cv-1523-RCL, and is a class action representing all individuals and entities who have paid a PTIN.

PTINs have been required since the 2011 filing year and the IRS has collected between $175 million and $300 million in PTIN fees, according to various estimates. Unless this case is reversed on appeal, the IRS will have to refund all that money. About 1.3 million PTIN fees have been issued, and 710,553 people currently have one. The fee was at one time about $64, but was reduced to $50 in 2016 after the Steele litigation commenced. Of that $50, a private vendor that issues the fees received $17 and the IRS received $33. It is a flat fee per preparer, regardless of how many returns the preparer files.

The “service or thing of value” standard comes from a federal law, 31 U.S.C. § 9701(b), and a U.S. Supreme Court decision distinguishing taxes from fees, National Cable Television Association, Inc. v. United States, 415 U.S. 336 (1974). Fees are incident to a voluntary act and bestow special benefits on the fee-payer that is not shared with the general public. The IRS argued that the authorization to prepare tax returns for compensation was the thing of value provided by the IRS in collecting the fee.

The judge rejected this argument, pointing to the 2014 Loving v. IRS decision that rejected IRS regulation of paid tax preparers because they “practice before” the Department of the Treasury, a rationale the judges in that case said was stretched. Here, Judge Lamberth concluded: “Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.”

The judge did not consider the plaintiffs’ second argument that the fees are excessive, in that they are more than the IRS’s actual costs. By invalidating the IRS’s authority to collect the fees, he essentially ruled that any amount is excessive.

Yesterday, the IRS posted a statement completely suspending the issuance and renewal of PTINs, not merely stopping the collection of the fee. The IRS referenced the judge’s decision as the reason, and said that it is working with the Department of Justice to decide how to proceed.

On the possibility of the judge’s ruling being reversed on appeal, Kay Bell of Don’t Mess with Taxes writes: “[W]hile I wouldn’t go spending any PTIN refund money just yet, if you’ve paid for the identifier over the years, you might want to at least make a wish list.”


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